Research.LeutholdGroup

Our March report titled Lifeboat Drill examined the effectiveness of sectors, styles, and factors in protecting investors during major market declines. We found that Consumer Staples are significant and consistent outperformers during times of distress, serving as “comfort food” for investors trying to minimize their financial and emotional distress in a falling market.  Staples are relatively inexpensive today based on market-relative metrics, and today’s level of cheapness has historically corresponded to positive relative returns going forward.

• Read more

Well-respected analysts have been espousing different views on the Staples sector’s overall valuation. Some argue Staples is rather richly priced, while others believe it is a bargain in the making. Disagreement creates opportunities, and we believe a closer look at Staples is in order.

• Read more

ETFs that focus on a single sector, style, or theme enable investors to make tactical calls that reflect their outlook and risk tolerance, resetting their risk/return profile to benefit from prevailing economic and market conditions. As fate would have it, the explosion of tactical, thematic funds that began 15 years ago coincided with a drought in market cycles.  Following the Global Financial Crisis, the S&P 500 only experienced one moderate drawdown in the next nine years, meaning that opportunities to judge these new thematic ETFs during market declines were in short supply.  This dearth of real-world corroboration has been remedied in recent years as the market experienced three major declines in the span of 49 months, and this expanded sample size serves as the basis for our current study evaluating defensive ETFs in down markets.

• Read more

We are curious if factor ETFs have provided downside protection in recent years’ selloffs or whether their defensive nature, shown by academic studies, is lost in the translation to live-money portfolios.

• Read more

Real Estate was the top performing sector in the final quarter of 2023, climbing an impressive 18.8% against the market’s 11.7% gain.  Signs of enthusiasm for the REIT industry have been rare in recent times.  While the S&P 500 gained 96% over the last five years, REITs returned a paltry 31% over that time.  We wondered if last quarter’s success signaled that it was time to take a fresh look at the group.  This report examines the investment merits of REITs as an asset class, using the mental model of evaluating “what you pay vs. what you get.”

• Read more

Since the pandemic, investors have been leery of adding REITs to their asset mix due to fears that flexible scheduling and work-from-home will permanently diminish the demand for office space. While that view may prove correct, the magnitude of such a change is much less significant than some might suspect.

• Read more

The Magnificent Seven’s remarkable performance defines the stock market in 2023. This basket of the seven largest companies in the S&P 500 index gained an average of 111% vs. an average gain of 9% for the other 493 companies. The combined impact of huge index weights and outsized performance made 2023 one of the most top-heavy markets in history. Whenever assets outperform to this degree over just a few quarters, the valuation alarm bells start clanging. Could the fundamentals possibly justify such a massive advance, or is AI mania responsible for the outperformance?

• Read more

Whenever a basket of stocks with the market heft of the Magnificent 7 shows a price gain of 111% in a single year, the valuation alarm-bells ring loud. Is this gain the result of a mania for all things AI, or could the move be justified by equally magnificent fundamentals? 

• Read more

Depending on how you measure it, with a few days to go, it’s either been a superbly profitable 2023 or a year that barely crept above the 30-year average.

• Read more

Will 2023 be remembered as a delightful year with +20% returns, or might it go down as a time when stocks lagged even a risk-free money market fund? We introduce this month’s research topic: The huge return disparity between the capitalization weighted S&P 500 and the equal weighted version.

• Read more

Performance chasing is one of the most common behavioral errors made by mutual fund investors and represents one of the most heavily traveled roads to poor investment results.  Now, when we use the phrase performance chasing it is universally understood that we are talking about chasing good performance. That is why we are so intrigued with TLT, this year’s fund flow leader among bond ETFs. The iShares 20+ Year Treasury Bond ETF has raked in over $20 billion in new assets this year, but not by posting strong results. Rather, inflows have surged despite returns that are frankly terrible. Such an incongruity deserves a closer look, and this study lays out some of the key storylines behind this surprising development. 

• Read more

One of this year’s most fascinating stories in financial markets evolves around investors’ atypical response to the dreadful returns posted by TLT (iShares 20+ year Treasury bond ETF). Despite its dismal performance, investors have been moving a tremendous amount of money into TLT. 

• Read more

The momentum style factor has a long history of producing excess returns and is found in the security selection toolbox of many asset managers. This concept is regarded with such esteem that a number of ETFs have been launched to capture this value-added factor, including eight funds with AUM exceeding $300 million. The Magnificent Seven, the seven largest stocks in the S&P 500 index, have booked remarkable returns in 2023 with the equal weighted performance of this basket of tech titans gaining 88% YTD. The also-rans that make up the other 493 members of the S&P 500 have collectively returned a pathetic 1.6%. The Magnificent Seven seem to embody the momentum factor perfectly, yet momentum ETFs have been hugely disappointing this year. Not only have they failed to capture the Magnificent Seven move, but these ETFs have also badly lagged the broader market. This leads to the question, “In a seemingly perfect environment for momentum, what happened to the missing mo?”

• Read more

In a year when the Magnificent Seven has epitomized the concept of price momentum, investors who spotted that phenomenon and employed a momentum ETF to capitalize on the trend were not rewarded: Owning MTUM or SPMO not only forewent the tech titan rally, they both badly lagged the S&P 500.

• Read more

If uncertainty is the bane of investors everywhere, then the fear of large losses in a bear market is the boogeyman hiding in the closet. The threat of an agonizing downturn often leads investors to carry lower equity weights in their balanced portfolios than might be advisable, and even drives them to hold excess cash to avoid the risk of sizable declines.

ETF families have responded to this anxiety with a fund design that takes some downside risk off the table and may enable investors to tiptoe into equities even when they suspect a selloff might be around the corner. Known as “buffer”, “defined outcome”, or “target outcome” funds, these ETFs utilize an options collar overlay to trim the upside and downside tails of the underlying asset’s return distribution, thereby giving nervous investors a more comfortable way to pick up some equity exposure during riskier times.

• Read more

Option collar strategies provide a defined outcome on the date of maturity, but the value from inception to maturity varies. In the case of an extreme market move either direction, a collar strategy will not capture the fullness of the fluctuation early in its lifecycle, but should reach its cap/floor value as maturity nears.

• Read more

Despite skyrocketing investor enthusiasm, buy-write strategies are complicated investments with skewed payoff structures that muddle the interpretation of past performance, because returns depend on market conditions.

• Read more

Many investors appreciate the benefit of covered-call strategies, but we wonder how many truly understand the opportunity costs of buy-write funds over time—or under differing conditions. On the surface, these approaches are simple, but they have complicated payoff patterns relative to stock and bond funds.

• Read more

After years of wandering in the wilderness, Japanese stocks are leading the world’s developed markets higher in what has been a robust opening half of the year. The table shows Japan leading the world’s ten largest developed markets (as measured by the MSCI family of international indexes) with a 24% local currency return through June, easily outpacing the pack. Even as the MSCI USA index gained 17% by successfully “fighting the Fed” this year, Japan surged another 7% beyond that outstanding result.  We were curious to understand the nature of Japan’s spectacular run in 2023, looking to identify the drivers of this strong and relatively quick jump higher.

• Read more

After being ignored for a generation, Japanese stocks are roaring in 2023. The Nikkei puts the S&P 500’s 16.9% YTD gain to shame with its +28.7% return. With developed international equities (ex-Japan) up a paltry 9.5%, diversification from expensive U.S. stocks cannot fully explain Japan’s surge.

• Read more